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INSTITUTIONAL RESEARCH HDFC sec Capital Markets Investor Forum

Brighter days ahead

28 Jun 2019

CORPORATES MCap (Rs bn)

Asset Managers

HDFC AMC 435

RNAMC 137

Motilal Oswal AMC 102

Axis AMC NA

Brokers & Distributors

ICICI Securities 70

Geojit Financial Services 8

5 Paisa Capital 5

Depositories

NSDL NA

Exchanges

MCX 42

BSE 28

INDUSTRY EXPERTS

AMFI NA

Paytm Money/Depository Expert NA

Federation of Independent Financial Advisors (FIFA)

NA

Madhukar Ladha, CFA [email protected] +91-22-6171-7323

Amit Chandra [email protected] +91-22-6171-7321

Keshav Binani [email protected] +91-22-6171-7325

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Capital Markets Investor Forum

The H-Sec Capital Markets Investor Forum on 20-Jun-2019, included participants from a large number of listed and unlisted entities across the capital markets spectrum. These included Asset Managers, Brokers, Distributors, Depositories, Exchanges and Industry associations. The event highlighted some of the large opportunities and the challenges in Indian capital markets.

The event featured wide ranging discussions on the regulatory changes impacting the business models of AMCs and distributors, increase in competitive intensity faced by traditional retail brokers, market opportunity created by compulsory demat of unlisted companies, regulatory tailwinds than can expand commodity derivatives markets, and interoperability of clearing corporations which can ease operations and boost volumes.

Asset managers: We believe that regulatory changes have led to a difficult distribution environment. Volatile financial markets (both debt and equity) are negatively impacting retail flows to domestic mutual funds and PMS. In order to preserve profitability, AMCs have reduced payouts to distributors. Still, AMC profitability is set to improve in FY20E, as payouts get back ended and upfront commissions cease. Key monitorables include the allocation/walletshare of MFs in retail savings, overall flows and direct TER changes.

Brokers and Distribuotors: With increased competitive intensity (Refer our note: The Rise of Discount Brokers) and large brokers such as Axis and Angel chasing the discounter model, we expect broking yields to decline further. Additionally, regulatory reduction

in MF TERs will hit distribution revenues in the near term. In such an environment, cost control becomes key. We believe earnings growth for brokers will remain challenged over FY19-21E. Key monitorables here include launch of PayTM’s broking services and acceleration at newly converted discount brokers.

Depositories: The depository business in FY19 was impacted by lower retail participation and weak market conditions. Transaction revenue, which is market linked, was impacted both for NSDL & CDSL. The bigger delta came from annual issuer charges (annuity revenue) with the compulsory demat of unlisted public companies. This is a big opportunity as ~60K companies will come for demat over the next 2-3 years and the incremental cost associated is negligible. Depositories are investing in new initiatives like NAD, insurance depository and e-warehouse receipts, which will yield result later.

Exchanges: FY19 was a tough year for major exchanges (except MCX), as growth metrics softened after two strong years of growth. BSE lost significant cash market share to NSE in FY19, but after interoperability of clearing corporations, we expect BSE to recover some of its lost ground. Exchanges continue to explore and invest in new areas for growth like StAR MF, INX etc. The embedded non-linearity nature of exchanges business will result in margin expansion. MCX’s volume growth is expected to benefit from regulatory tailwinds. SEBI’s approval for Institutional participation and Indices launch for commodity derivatives are welcome steps and will expand the market. We expect some consolidation can also happen in the industry.

Capital Markets - Investor Forum Brighter days ahead

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Asset Managers

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CORPORATE ATTENDEE : Simal Kanuga, Head Sales

Regulatory changes implemented in the Asset Management Industry :

Restriction on payment of upfront commissions and reduction in TERs:

HDFCAMC has increased trail commissions for distributors. Distributors now receive the commission over a 3 year period.

The company stated that it has passed on ~80% of the reduction in TER to distributors on the existing AUM.

In the longer term, distributor commissions will be divided on a proportionate basis between the AMC and distributor.

HDFC AMC providing liquidity to FMP holders:

To deal with the illiquidity faced by FMP schemes due to their exposure to the NCDs issued by Essel group and the standstill agreement of HDFC AMC with Essel group, the company has decided to provide liquidity to the investors.

Such arrangement will entail acquisition by the HDFCAMC of said NCDs at the prevailing valuation on respective maturity/purchase dates. This arrangement may involve an outlay of upto Rs 5bn.

According to the company, its total exposure to Essel group debt is Rs 12bn. The company has stated that it has cover of ~1.2x and that it is confident of not losing money on this arrangement.

80%+ of exposures in debt funds are in true blue, low yield paper. IB Housing was a Rs 40bn exposure at peak; now at Rs 9bn.

Co uses its equity understanding to find debt opportunities (eg. KEC, Balkrishna) to help its debt funds get better quality exposure at decent yields and to reduce cost of borrowing for corporates.

Others:

Expects equity market share to hover in 15 - 17% range.

Market share is a little lower as large banks are more focused on selling products of their own AMCs eq. Banks such as SBI (98%), ICICI (62%), Axis (70%) sell their own AMCs' funds much more than HDFC Bank (33%) does for HDFCAMC.

Direct participation is not really taking off. Bulk of the growth is coming from U/HNIs applying direct and setting up a fee arrangement with advisors.

View:

We note the brand and distribution strength (HNI/Retail AUM market share 17/13%) and equity leadership position (~16% market share) that it enjoys. In our understanding it is relatively easier for distributors (especially IFAs) to sell HDFC AMC products because of the brand. We like HDFC AMC and believe this is a pure play on retail saving story.

We expect HDFCAMC to post a FY19-21E Revenue/PAT CAGR of 6.8/13.1% p.a. We value HDFCAMC at 29.1x (DCF derived) FY21E post tax operating profits + investments/cash (FY20E) to arrive at our 1yr forward fair value of Rs 1,755/sh.

HDFC AMC (CMP Rs 2,036, Mcap Rs 435bn, NR, FV Rs 1,755)

The leader

YE March (Rs mn) FY17 FY18 FY19P FY20E FY21E

Revenues 14,800 17,598 19,152 20,035 21,836

Growth (%) 2.6 18.9 8.8 4.6 9.0

EBITDA 7,039 9,665 12,460 14,876 16,761

EBITDA margin (%) 47.6 54.9 65.1 74.3 76.8

Growth (%) 5.4 37.3 28.9 19.4 12.7

APAT 5,502 7,216 9,666 11,532 12,924

APAT growth (%) 15.1 31.1 34.0 19.3 12.1

EV/EBITDA (x) 58.9 42.2 31.8 26.3 23.0

P/E (x) 73.2 58.4 44.2 37.0 33.0

RoE (%) 42.8 40.3 36.3 33.5 32.5

Source : Company, HDFC sec Inst Research

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CORPORATE ATTENDEES:

Prateek Jain, CFO

Hiroshi Fujikake, Chief Planning & Business Excellance

Abhishek Jaiswal, Investor Relations

Deal structure:

Nippon Life has signed a binding agreement with RCAP to increase its stake in RNAM from 42.88% to 75% at Rs 230/sh. The deal values RNAM at Rs 141bn i.e. ~US$2bn.

As part of the deal Nippon Life is required to make an open offer for the public shareholding of ~25%.

The deal has been structured in a way that Nippon Life will own 75%. Thus it will acquire only the balance shares (i.e. 32.12% less shares acquired through open offer).

The open offer window is expected to open between 17-Jul-19 to 29-Jul-19.

Business as usual:

Core business operations and management team will remain the same.

NPS business will have to be exited. Current AUM is < Rs 3bn.

Reliance brand:

Co unlikely to use the Reliance brand but a final decision is yet to be taken on this. We believe that 75% of the investors are corporates and HNIs, both of which already know of Nippon.

Near term focus:

RNAM will focus on gaining lost market share in corporates and HNIs. Corporate market share is down from 13% to 9% in 5 yrs while HNI market share is down from 15% to 5%.

ICDs:

Management stated that ICDs to ADAG companies of ~Rs 3.8bn are being serviced without any delay.

Foreign India funds to be launched:

Launching real estate, tech funds in Japan

Launching India ETF in Thailand and Australia

View:

We appreciate RNAM’s focus on building granular, stickier retail assets (39% of AUM, best in the industry). We are also encouraged by the emerging cost consciousness shown by the company hope that it continues into the future. Additionally, we are excited by the exit of ADAG as promoter, which we believe will aid fund raising from HNIs and institutions. We have a buy on RNAM with TP of Rs 254.

Reliance Nippon Life Asset Management (CMP Rs 221, Mcap Rs 137bn, TP Rs 254, BUY)

Ownership change to boost business prospects



Revenues 13,074 15,917 14,786 13,963 15,280

Growth (%) 9.0 21.7 -7.1 -5.6 9.4

EBITDA 4,665 5,094 5,390 6,617 7,547

EBITDA margin (%) 35.7 32.0 36.5 47.4 49.4

Growth (%) 12.0 9.2 5.8 22.8 14.1

PAT 4,026 4,594 4,870 5,604 6,342

PAT growth (%) 1.2 14.1 6.0 15.1 13.2

EV/EBITDA (x) 39.1 33.0 30.5 24.5 21.0

P/E (x) 32.1 29.3 27.9 24.2 21.4

RoE (%) 21.9 21.3 19.1 20.6 21.9

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Mr. Aashish Somaiyaa, CEO, MOAMC

Mr. Rakesh Shinde, Group IR, MOFS

Broking and distribution business:

MOFS is a franchisee driven model with over 2,400 outlets; 80% of revenues are retail. It is also a market leader in East India.

Dependence on group companies is relatively low as the MF only gives 5% of its brokerage pool to MOFS; only 25% of MO AMC PMS business broking pool is retained by MOFS.

Company believes that the competition in broking industry has reached its fag end and yield reduction will not be much here on.

Company is also focusing on building the PCG advisory business which has yielded ~Rs 50mn in FY19.

Asset management:

MO AMC believes that SEBI may clamp down on distributor commissions on the PMS business. Currently distributors are getting as high as 4-5% of AUM as commissions.

The business does see some fee re-negotiations in periods when markets are volatile and returns are low. Fee negotiations are done on a case by case basis.

According to the company, AIFs are set to see higher flows as these structures are more carry based and differential pricing my be offered to clients using share classes.

TER cuts will impact 1QFY20 earnings. Highest cut in TER has been taken by the Multicap 35 fund. On an average TER for the mutual fund business is ~160bps and commissions are ~100bps. Direct TER works out between ~60-65bps.

Added new talent in asset management with a new head of research Santosh Singh from Haitong Securities.

Housing finance business:

Clean up of the housing finance business is complete as most of the stress has been recognized. Focus is now on collections and new business growth.

MOFS has re-possessed ~500 properties (mostly in tier 2 or 3 cities on outskirts of Mumbai and Pune) of which management has been able to dispose 15-20 only. Business will not need additional capital for next 2-3 years.

View:

While we like the Asset Management slice of MOFS, especially given the scale it has achieved, we remain concerned about regulatory clampdown on PMSs. Given subdued trailing 1-3 yr returns in PMS, we believe HNI investors are likely to re-negotiate fees. It is also likely that SEBI (in line with its stance on MF expense ratios and distributor commissions) may clamp down on PMSs. On broking we are wary of increased competition. Lastly, despite much of the negatives in MOHL being factored in, the business needs to display scalability. Post recent correction in the stock price we upgrade the stock to NEUTRAL, however our TP remains unchanged at Rs 650.

Motilal Oswal Financial Services (MOFS) (CMP Rs 692, Mcap Rs 102bn, NEU, TP Rs 650)

Solid Franchise, Difficult times


YE March (Rs mn.) FY17 FY18 FY19P FY20E FY21E

Revenues 12,555 19,837 17,186 18,829 20,753

Growth (%) 58.1 58.0 -13.4 9.6 10.2

EBITDA 4,325 7,762 6,131 7,535 8,393

EBITDA margin (%) 34.5 39.1 35.7 40.0 40.4

Growth (%) 39.9 13.6 (8.8) 12.2 1.1

APAT 2,984 5,543 4,350 5,542 6,157

APAT growth (%) 131.3 85.7 -21.5 27.4 11.1

EV/EBITDA 12.5 15.9 12.9 11.6 10.3

P/E (x) 32.0 17.4 22.7 17.8 16.0

RoE (%) 19.7 25.9 15.2 17.1 17.1

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Axis AMC Growing private AMC

CORPORATE ATTENDEE:

Manesh Thakur, VP Sales

Axis MF is the 9th largest AMC in India with total assets of ~Rs 877bn as on Mar-19. AUM break up for Equity/Debt/Liquid/ETFs is 56.7/19.0/24.2/0.1%.

AXIS MF has been consistently gaining market share in both equity and total AUM. Its AUM market share and equity AUM market share have improved from 2.2% to 3.7% and 12.5% to 14.3% respectively during FY15-19.

Axis MF has consciously decided to deleverage or de-risk its distribution network by reducing its dependence on Axis Bank for distribution. Share of new inflows sourced through Axis Bank has reduced from 40% in FY18 to 25% in FY19.

The company has an existing SIP book of Rs 4bn/month.

AXIS AMC always had a sharing agreement with distributors. Thus the reduction in TER has been proportionately passed on to the distributor and the balance has been taken by AMC.

Broadly the sharing is 60% to the distributor and 40% to the AMC.

Mr Thakur highlighted that industry distributors intent while selling an SIP has been to make sure that the Investor has a horizon of 10 years.

Axis MF has been very conservative on the credit side and has consciously decided not to aggressively sell this product.

The company had launched credit risk funds 2 years ago. Despite the company’s belief in this opportunity, it remains cautious on this segment.

View:

We believe AXIS MF is a solid franchise, run by a strong management team. Further, credible parentage of Axis Bank puts it in at an advantage to corporate-led fund houses.

Superior AUM growth (FY14-19 CAGR 42.9%) coupled with high equity in the mix makes Axis AMC an interesting company to track, especially given the strong rise in Indian financial investments.

Profitability for Axis AMC has been lower compared to peers as it printed PAT of only Rs 550mn (6.5bps of AAUM) in FY19.

YE March (Rs mn) FY14 FY15 FY16 FY17 FY18

Revenues 861 2,009 3,797 5,280 7,436

Growth (%) 51 133 89 39 41

EBITDA 14 58 361 592 527

EBITDA margin (%) 1.6 2.9 9.5 11.2 7.1

Growth (%) NA 325.8 526.4 63.7 (10.9)

PAT 16 80 316 570 430

PAT growth (%) NA 392.3 297.2 80.0 (24.5)

NOPLAT (as bps of AAUM) 0.0 1.5 10.0 11.1 5.1

ROE (%) 3.2 9.1 22.6 30.9 18.3


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Brokers & Distributors

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ICICI Securities (CMP Rs 218, Mcap Rs 70bn, NEU, TP Rs 240)

Differentiated offerings & productivity enhancement


Harvinder Singh, CFO

Vishal Gulechha, Head Retail Business and Hariharan M., IR

Broking

Environment continues to be extremely competitive with discount brokers acquiring additional market share.

ISEC has launched additional features such as Prime and eATM to retain and add customers.

Under the eATM facility ISEC offers same day cash payout upto Rs 50k for sell trades on 600 stocks on BSE.

Under the above categories customers can transact at lowered brokerage rate (list price is 55bps) and receive payout on sale of shares on the same day up to the indicated limit.

ISEC highlighted that ~95,000 customers have signed up for Prime.

ISEC has also entered into a revenue share agreement with ICICI Bank for new customers acquired through the bank where it will share part of first year revenues with the bank.

Distribution

MF distribution will see additional yield compression in 1QFY20 as impact of TER cuts will play out.

ISEC has also partnered with STAR Health and Religare fordistribution of health insurance products.

Costs

Management agreed that current costs are high and that it wasdetermined to improve productivity to boost profits..

Given that equity broking and mutual fund distribution was largelyonline driven, costs on distribution of other products such as PMSand AIF are comparatively higher.

Recall in 4QFY19, ISEC had reported a reduction of 150 RMs QoQto ~1,200. We believe that some benefits of productivity increaseand lower headcount will start flowing over FY20/21E.

View

With increased competitive intensity (Refer our Note: The Rise ofDiscount Brokers) we except broking yields to decline further.Additionally, regulatory reduction in MF TERs will hit distributionrevenues. The only silver lining we see is the emerging costconsciousness. We expect an anaemic FY19-21E APAT CAGR of7.6% p.a.

Customer fees (Rs/pa) Cash brokerage (bps) Same day payout limit

(Rs mn)

900 25 1

4,500 18 4.5

9,600 15 10

ISEC is offering three different tariff plans for Prime clients


Revenues 13,429 17,824 16,406 16,611 17,619

Growth (%) 25.8 32.7 -8.0 1.2 6.1

EBITDA 5,049 8,427 7,281 7,550 8,183

EBITDA margin (%) 37.6 47.3 44.4 45.5 46.4

Growth (%) 40.8 66.9 (13.6) 3.7 8.4

APAT 3,386 5,577 4,776 5,099 5,530

APAT growth (%) 41.8 64.7 -14.4 6.8 8.5

EV/EBITDA (x) 14.0 8.6 7.4 9.3 8.6

P/E (x) 20.2 12.2 14.3 13.4 12.3

RoE (%) 76.3 84.3 50.8 45.1 42.4


https://www.hdfcsec.com/hsl.docs/Broking%20-%20Update%20-%20Mar19%20-%20HDFC%20sec-201903191711243793044.pdf

https://www.hdfcsec.com/hsl.docs/Broking%20-%20Update%20-%20Mar19%20-%20HDFC%20sec-201903191711243793044.pdf

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CORPORATE ATTENDEE: Satish Menon, Director

Broking

75% of revenues are from own branches while 25% of revenues are from franchisees.

Company has lost volume market share over FY19, with its cash market share at 1.65% (-9bps) and derivatives market share at 0.23% (-10bps YoY).

Blended broking yields continue their downward slide (in line with other players in the industry) to 3.87bps in FY19 from 5.10bps in FY18.

In FY19 share of F&O is 74% vs. 97% for the industry. Additionally, delivery based volumes (higher yielding) are higher at 32% vs. 25% for industry.

Only ~48% of the business is online vs. 95%+ for ISEC. Co has ~Rs 1bn in MTF/T+5 book on which it earns a yield of

18%pa.

SIP book

Company’s SIP book is at Rs 1.7bn (+4.9% YoY). During FY19 the company has added only Rs xxmn net to its SIP book. This is despite adding Rs 400mn gross SIP inflows.

Management attributed this to increased cancellations of older SIPs. According to the management this is an industry phenomenon- as old SIPs are getting cancelled.

According to Geojit, FY19 SIP cancellation rate is ~16% for it vs. 19% for the top 20 distributors in the industry.

Co mentioned that direct is gaining incremental market share but is more a threat to urban centric distributors than it.

Mr. Menon also suggested that even within SIPs direct is gaining market share. Direct contribution to monthly SIP inflows for Mar-19 stood at Rs 8.9bn (+41% YoY). About 11% of the SIP inflows are sourced through the direct channel.

Geojit believes ban on upfront commission will have limited impact on its financial performance. It believes yields will decline by ~10% in FY20 vs. FY19.

On old existing AUM, where it has already received upfront and trail is very low at ~40-50bps, the company is trying to negotiate a higher commission payout from AMCs. Geojit has ~Rs 6bn of old low commission bearing older AUM.

Geojit management stated that it will approach investors to churn assets to better performing funds- this way while the investors costs remain similar the payout for itself will increase.

Geojit recommends funds only based on its research; commissions do not influence recommendations to clients.

Other points

Believes that there will be some decrease in market share of top 5 asset managers as competition from medium sized AMCs particularly ranked 8-15 will increase.

Co will also focus on distributing insurance products as insurance companies continue to pay high upfront and trail commissions.

The company has a small PMS AUM of ~2bn. The company wants to focus on sale of alternatives products.

It had recruited ~400 employees for raising AUM. Co has stopped adding employees given lacklustre markets and believes natural attrition will reduce costs over time.

View

We remain wary of the competitive challenges faced by traditional brokers due to the rise of discount broking. Additionally, deterioration in the profitability of distributors owing to regulatory changes will depress profits further.

We believe this business will go through consolidation over the next 12-18 months.

Geojit Financial Services (CMP Rs 34, Mcap Rs 8bn)

Facing severe headwinds

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Prakarsh Gagdani, CEO

Pooja Kashyap, IR

Revenue

5 Paisa charges Rs 10/order irrespective of segment. The company does not charge for account opening.

Market share 2% total, 2.4% in cash. Most customers are investors (not traders). ADTV is ~Rs 250bn with F&O:Cash at 96:4.

Currently 5 Paisa has ~0.2mn customers with an active customer base of 0.12mn. Immediate target for the company is to increase market share and to take total customer base to 1mn. Current customer acquisition rate is ~35k/qtr. Account opening is online, seamless and similar to that of Zerodha.

Bulk of customers of the company are located in Tier II-III cities (71%) and are first time customers (70%).

Customer avg. age is currently ~30 and on an average customers hold ~Rs 45k each with the broker.

Total margin funding book size for the company is ~Rs 700mn.

Costs

5 Paisa has ~800 employees with almost 650 in call to assist in sales and ~70 in technology. Avg. cost per employee is ~Rs 0.3mn and total employee costs are ~ Rs 258mn.

Total other costs are ~Rs 512mn. Within other costs the largest cost item is advertising of Rs 300mn. 5 Paisa has acquired ~140k customers in FY19 implying a client acquisition cost of ~Rs 2.1k/customer.

With the proceeds of the right issue 5 Paisa is expected to intensify its client acquisition efforts through advertising.

5 Paisa believes that once it achieves critical mass, word of mouth publicity will lead to lower client acquisition costs.

Others

Management is cautious on the entry of PayTM as it has high reach. PayTM already has 15mn customers.

Platform: Management stated that customers primarily unse the mobile platform (75% of trades). Over the last three years it has invested ~Rs 1bn and total app download is ~2.7mn.

P2P Lending platform is expected to go live in Aug-19. This platform will bring together lenders and borrowers for a fee of 3.5% (2.5% from borrower and 1% from lender).

View

With the conversion of traditional brokers such as Angel and Axis to discounters, we believe broking is becoming increasingly price competitive making it difficult for new entrants to gain marker share. We believe 5 Paisa will be in investment mode- platform and customer acquisition with breakeven earliest expected only in 4QFY20E. Key monitorables include market volumes, customer adds, and customer acquisition costs.

5 Paisa Capital (CMP Rs 208, Mcap Rs 5bn)

Aspiring for Scale

(Rs mn) FY17 FY18 FY19P

Revenues 75 189 559

Growth (%) NM 152.5 196.7

EBITDA (149) (325) (211)

EBITDA margin (%) (198.9) (172.6) (37.7)

PAT (104) (253) (166)

EV/Sales (x) 61.5 28.2 8.9

P/E (x) NM NM NM

RoE (%) (13.2) (33.5) (15.7)


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Depositories

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CORPORATE ATTENDEE:

Prashant Vagal, SVP

NSDL is the largest depository in India with 51% of Beneficiary Owner (BO) accounts and 60% revenue market share. NSDL had the first mover advantage. The bulk of institutional and promoter shareholding resides in NSDL (~90% of demat value).

Globally there are different depositories for different asset classes. India and Russia are the only countries with two depositories for a single asset class. Also, globally a small number of demat accounts suffices (with high value) because securities are stored in sub-accounts at the broker (or DP) level, not at the depository level.

NSDL has an institutional focus with ~277 registered DPs vs. 599 for CDSL, which is mostly retail focussed. NSDL/CDSL have 18.6/17.6mn demat accounts. CDSL is gaining retail market share by adding smaller DPs. In terms of incremental accounts additions, NSDL/CDSL are split 36/64%.

Out of the 18.6mn demat accounts in NSDL, ~2.5mn (13%) are duplicate accounts. NSDL has 25,235 registered issuer companies (~5K listed and ~20K unlisted). This count was up 25% YoY in FY19 owing to the addition of many unlisted companies.

Revenue per issuer for NSDL is Rs 43k vs Rs 55K for CDSL. The lower realisation in NSDL is due to the higher no. of unlisted companies (lower realisations).

There are around 60K unlisted public companies which can come up for dematerialisation over the next 2-3 years. The current monthly rate of addition is ~500 companies. This can accelerate.

NSDL has dematerialised shares of ~5K unlisted companies already. It charges ~Rs 10K one time demat fees and ~5K/year as issuer fees. This is annuity in nature.

Kotak Bank and Kotak Life currently hold 0.20/2.95% stake in NSDL. Kotal Life is the only non-DP shareholder in NSDL. According to SEBI, no shareholder can hold more than 15% in a depository. IDBI Bank & NSE hold 30/24% stake in NSDL.

NSDL is the only depository to have a payments banks licence (received in Oct-18), which will allow NSDL to accept payments up to Rs 1lakh.

NSDL revenue has grown at a CAGR of 16.6% over the last five years. It operates at fat margins (37.6% for FY19; excluding the loss of payment bank, margin stood at 43.7%). This is still lower than CDSL (56% for FY19). The difference is mostly in other expenses which for NSDL/CDSL is 33/21% of revenue.

NSDL (Depository)

Robust growth opportunity

YE March (Rs mn) FY15 FY16 FY17 FY18 FY19

Net Revenues 1,598 1,845 2,521 2,633 2,860

EBITDA 400 733 1,028 1,098 1,074

EBITDA Margin % 25.0% 39.7% 40.8% 41.7% 37.6%

APAT 517 974 1,000 1,058 1,109

EPS (Rs) 12.9 24.4 25.0 26.5 26.5

Net Cash (Rs bn) 4.46 4.91 5.82 6.86 7.66

RoE (%) 13.7% 21.0% 18.2% 16.6% 15.1%


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Exchanges

15


CORPORATE ATTENDEE:

Sanjay Wadhwa (CFO)

MCX has tied-up with Axis Securities, ICICI Securities, Yes Securities and HDFC Securities to tap the retail opportunity. This can add another 5-10% to growth over the next two years.

Regulatory approvals for Institutional participation in commodity derivatives and launch of Indices are welcome steps and hold the key to higher depth in the commodity derivative segment.

It will take another six months for the institutional participation to contribute to volumes as most fund houses will have to launch new funds. Gold ETFs and arbitrage funds will be among the first vehicles of institutional participation in commodity derivatives.

Commodity Indices will find gradual acceptance. They can eventually boosts volumes via strong Institutional participation. ~80% of NSE’s derivative volumes comprises Index futures and options. MCX will launch Index futures ahead of Index options.

MCX is considering the launch of a Gold and Natural Gas Spot exchange in the next six months. The regulatory cash requirement for setting up the spot exchange is ~Rs 1.00-1.50bn.

Trading volumes have been steady with current ADTV at Rs 273bn vs Rs 270bn in 4QFY19. Bullion volume is recovering owing to the increase in open interest. Large organised jewelers have started hedging on MCX and now contribute ~30% of total open interest. Jewelers like Bhima, TBZ, Kalyan, Tanishiq are large hedgers in gold (~30% of open interest).

Options volume growth is slower than expected. MCX will not charge for options for the next two quarters.

Cost management will continue. Fixed cost (~70% of total cost) will increase by 4-6% YoY hereon.

There is no active proposal to merge with NSE. However, we see synergies related to technology and platform with minimal cannibalisation of existing volumes.

View:

Regulatory tailwinds like Institutional participation, Indices and tie-up with Retail bank subsidiaries will boost trading volumes and depth in the long run. Globally Institutional clients account for ~50% of the total derivatives volumes. We continue to remain constructive on the long-term growth opportunities and the concern related to increase in competition and pricing pressure is subsiding. The market is expanding with entry of new market participants and products. We see value in MCX based on (1) Embedded non-linearity, (2) ADTV growth despite rising competition, (3) Market leadership and (4) Net cash of Rs 13bn (~30% of Mcap).

MCX (CMP Rs 833, Mcap Rs 42bn, BUY, TP Rs 950)

Regulatory tailwinds will boost volumes


YE March (Rs mn) FY17 FY18 FY19 FY20E FY21E

Net Revenues 2,539 2,598 3,000 3,554 4,179

EBITDA 740 719 940 1,311 1,730

APAT 1,210 1,084 1,502 1,617 1,936

Diluted EPS (Rs) 23.8 21.3 29.5 31.8 38.1

P/B (x) 3.1 3.1 3.4 3.3 3.2

P/E (x) 35.0 39.1 28.2 26.2 21.9

EV / EBITDA (x) 44.4 45.4 35.5 25.3 19.0

RoE (%) 9.1 7.9 11.4 12.8 14.9

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CORPORATE ATTENDEE:

Neeraj Kulshrestha, CBO

Interoperability of clearing corporations is a positive development and will help BSE regain some market share in the cash segment. Interoperability is applicable from Jun-19 and will pick up gradually. It also offers better utilisation of margins by clients.

BSE’s cash market share is 8.4%. We believe it has bottomed out, and can only rise in the wake of interoperability.

BSE’s StAR MF platform has helped in expanding the Mutual Fund industry and reduced client on-boarding costs. MFs pay Rs 8/transaction. BSE claims this can rise to Rs 15/transaction.

The benefits of StAR MF include efficient on-boarding of clients, order processing and settlement. StAR MF does not directly register clients on its platform. They are mapped through the Mutual fund Distributor or IFA (Advisor), which ensures protection of client identity.

StAR MF processes ~4.0mn transactions per month and is expected to process ~45-50mn transactions in FY20E (+30% YoY). The average realization is Rs 8/trade and will generate Rs 360mn revenue in FY20E. There is virtually no incremental cost with a rise in volumes.

Listing fees for ~2K common stocks (listed both on NSE and BSE) is at par but for ~3K exclusive listed stocks on the BSE it was lower than company average. BSE has hiked listing fees by 20% which will boost revenue listing revenue in FY20E. The company plans to hike the listing fees for exclusively listed companies every two years.

BSE has been investing in new initiatives like India International exchange (INX), Insurance Platform, Commodity derivatives which

is hurting margins. In FY19 BSE total cost (excluding the impact of the IL&FS hit) increased by 12% YoY. EBITDA margin stood at 6.5% vs 25.7% in FY18. The cost of running INX is ~Rs 300mn annually with zero revenue. Margins will recover in FY20E as costs are expected to increase by 7-8%.

View:

Over the last few years, BSE has faced multiple issues like (1) Loss of cash market share, (2) Sluggish revenue growth in revenue related to markets like transaction revenue, IPO & Book building, and (3) Continued investment in new platforms like INX & Commodities despite a slowdown. The stock is down 27% over the trailing year. The recent buyback of Rs 4.6bn (~16% of Mcap) at Rs 680/sh will provide downside protection. We expect incremental revenue from new platforms, volume revival and higher listing fees can help drive revenue growth of 13.0/10.4% in FY20/21E. We expect some operating leverage to play out with growth (EBITDA margin of 13.0/17.0% for FY20/21E). We sense value emerging, with (1) Net cash of Rs 20bn (~73% of MCap), (2) New growth engines, and (3) High dividend yield of ~5%.

BSE Ltd (CMP Rs 610, Mcap Rs 28bn, BUY, TP Rs 802)

On the verge of recovery


Net Revenues 3,937 5,072 4,503 5,090 5,619

EBITDA 359 1,302 291 660 957

APAT 2,197 2,399 2,077 2,028 2,305

Diluted EPS (Rs) 48.8 53.3 46.1 45.0 51.2

P/E (x) 12.5 11.4 13.2 13.5 11.9

EV / EBITDA (x) -7.8 1.0 10.6 11.8 7.9

RoE (%) 8.3 7.8 7.1 8.1 9.1


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Industry Experts

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Association of Mutual Funds in India (AMFI) Influential industry body CORPORATE ATTENDEE:

N S Venkatesh, CEO

Mr Venkatesh highlighted that unique folios in the industry are growing at a healthy pace of 16-17% p.a.

He highlighted that AMFI has not received any negative feedback from AMCs on the reduced TERs and restriction on payment of upfront commissions. He also believes that churn in the industry will reduce as distributors are not incentivized to advise investors to churn.

AMFI is not actively promoting direct investing. It believes that direct investing will pick up in due course. Increasing mutual fund penetration is more important for AMFI. We see this as a mature (and guarded) stance by AMFI to assuage distributor angst at a time when TER cuts have been passed on.

Mr. Venkatesh believes corporate India is in the middle of a difficult credit cycle. AMCs will face the heat and may see outflows from credit risk funds. Also he believes many new investors are facing credit risk for the first time (since most inflows have come in after FY14). Hence, redemptions could be high.

AMFI’s budget recommendations to the Finance Ministry for the Jul-19 budget include:

Proposal to introduce debt-linked savings scheme in order to channelize long term savings of retail investors into the corporate bond market. It is asking for similar tax benefits under chapter VI-A to be accorded to such schemes.

Level playing field with NPS: AMFI is asking for tax exemption under section 80CCD for investment in pension schemes offered by mutual funds. Currently this deduction is only available for investments in NPS.

Intra-scheme switches (dividend to growth or vice versa) should not be considered as transfer.

According to him, there is a strong case for review of rating agencies.

AMFI certifies distributors and issues ARNs to them. Only after issue of ARN is a distributor allowed to commence business. AMFI is actively involved in investor protection and acts as an intermediary between Investors and AMCs in addressing investor grievances.

View:

The asset management industry is still at a nascent stage in India and AMFI has played a pivotal role in the proliferation of the SIP culture.

We believe AMFI is extremely influential and plays a key role in representing MF industry interests to regulators. This is supported by the fact that AMFI issued guidelines on valuation, and payment of distributor commission have been implemented by mutual funds (as standard practices) and SEBI (as statutes).

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CORPORATE ATTENDEE:

Cyrus Khambata (Director - Paytm Money), Ex-CDSL

As per the Depository Act a depository has to regulate, inspect and audit the Registrar and Transfer Agent (RTA). SEBI does not allow the depository to directly function as a RTA.

However, recently both the depository (NSDL & CDSL) have got the approval to become RTAs but only through the subsidiary route. Globally depositories do not perform the function of RTA.

Paytm is directly connected with all RTAs and has exclusive tie up with CDSL for dematerialisation of mutual fund folios.

BSE StAR MF platform took seven years to develop which led to the rise of other platforms like MF utilities, CAMS etc.

Demat of Insurance policies is slow because distributors are against it. However, some large distributors like HDFC Bank and ICICI Bank have started supporting dematerialisation of insurance policies. LIC is still not participating, owing to pressure from LIC agents, who account for the bulk of its retail sales.

Paytm money is a platform for direct investment in mutual funds. There are around 0.4mn active customers, 0.6mn registered customers. Paytm Money is an app-only platform and sources customers via Paytm which has ~80mn active customers.

Paytm Money has a team of ~200 people out of which ~140 work on application development. There is no sales and marketing spend for client on boarding.

Paytm is looking to launch broking services also, on a subscription- based model.

On depositories, Mr Khambata said that the unlisted public companies opportunity is real. About 60K companies can come for dematerialisation over the next two years. Currently, additions are slow but can accelerate. With unlisted private companies, the count goes to as high as 0.5mn.

The National Academic depository is also a big opportunity but currently the pace of adoption is very slow. Universities are slow to adapt to the system.

KYC Registration Agency (KRA) is for capital market transactions and is regulated by SEBI. Currently there are ~30mn KRA records. C-KYC has ~100mn records but there are issues with data validation, as there is no in-person verification required in C-KYC.

The offline e-KYC is done using QR code on a voluntary basis and maintains privacy. This will boost the demand for e-KYC services and CDSL, which has ~60% market share will be a beneficiary.

Paytm Money/Depository expert Untapped opportunity

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CORPORATE ATTENDEE:

Dhruv Mehta, Chairman

The FIFA currently has ~2,700 members with 2,300 direct individual advisor members and ~400 associate members through four associations.

Currently, ~80k KYD compliant IFAs are operating in India. In terms of AUM distribution the 80/20 rule applies here as well.

IFA’s AUM is estimated to be Rs 4.6tn (18.0% of total AUM and 43.1% of equity AUM), making it equity heavy.

Ban on upfront commissions and lower TERs:

Larger asset management companies have passed on 80-90% of the recent TER cuts to all the distributors, while smaller sized asset managers are still paying higher commissions and are absorbing a higher percentage of the TER cuts.

Mr Mehta believes that there will be a gradual shift in market share towards smaller sized asset managers as IFAs are now

incentivized to move assets to smaller managers. However, this is unlikely to ignore performance. He believes that distributors will push funds that not only pay better to distributors but also deliver performance.

Mr Mehta elaborated that the ban on upfront commissions and lower TERs have made it increasingly difficult for smaller IFAs to survive. He believes that the perceived barriers for individuals to sign up as IFAS have risen significantly.

Larger IFAs are also looking to diversify into distribution of other products i.e. PMS, AIFs, etc.

Other points:

Mr Mehta believes despite growth of direct schemes investors continue to need advice and will always consult with IFAs. This is even more true for HNIs as ticket sizes are high.

At the IFA level, he believes it is difficult to shift incremental flows to insurance as IFAs are not that savvy. Not too many IFAs are selling both mutual funds and insurance. Banks and corporate distributors are moving incremental savings flow towards insurers.

TERs charged by Indian MF industry are one of the lowest in the world. He stated that in India TERs include full distribution commission and are not paid out separately while in the US distribution commission is paid out in addition to the expense ratio.

FIFA also believes that SEBI is focussing more on investor protection vs. increasing penetration of mutual funds.

View:

We believe that SEBI’s clamp-down on distributors is a bit harsh, especially the ban on upfront commissions. There is a genuine cost of acquiring new customers.

Federation of Independent Financial Advisors (FIFA) Hard hit!

IFAs (no.) AUM range AAUM (Rs mn)

70 Greater than Rs 5bn NA

740 Rs 1bn - Rs 5bn NA

1,000 Rs 5mn - Rs 1bn NA

8,000 Rs 100mn – Rs 500mn NA

21,000 Rs 10mn – Rs 100mn Rs 40mn

37,000 Less than Rs 10mn Rs 2mn

IFA segmentation:

Assuming a yield of as high as 100bps, only ~10k IFAs earn a pre-tax income greater than Rs 0.4mn. Data suggests that for most individuals in the lowest IFA bracket, selling mutual funds is a part time endeavour.

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